7 ms·

While I look forward to the outcome of this, it's worth noting that the SEC has claimed that "airdrops", or simply giving away tokens to others for free, should

While I look forward to the outcome of this, it's worth noting that the SEC has claimed that "airdrops", or simply giving away tokens to others for free, should also be considered securities, as well as "pre-mines", where you mine cryptocurrency before the public receives it. The SEC has an ever expanding view of what it should be responsible for regulating. I cannot understand how issuing a digital asset without receiving any money could fail the Howey Test.

toomuchtodo 7y ago
You're giving away a security that is still considered a security. That doesn't mean it won't be regulated as a security.
- seibelj 7y ago
  Yet Bitcoin and Ethereum are not considered securities by the SEC. So clearly the same sort of asset is considered a security sometimes but not other times, essentially whenever the SEC decides.
  - stingraycharles 7y ago
    > Yet Bitcoin and Ethereum are not considered securities by the SEC. Why is that ?
    - seibelj 7y ago
      Bitcoin and Ethereum do not pass the Howey Test because they are "sufficiently decentralized", primarily because no single enterprise is responsible for developing it. But there is no framework on how exactly one becomes sufficiently decentralized, and because Ethereum had an ICO and is not a security, we know there is a way to do an ICO without needing to be registered. Unfortunately the current regulatory framework is opaque. The SEC "knows them when they sees them" so to speak but cannot explain clearly how to avoid becoming a security. My hope is that this lawsuit will result in clear guidance on how to become a Bitcoin or Ethereum, which will significantly help boost the industry.
      - nostrademons 7y ago
        ETH was specifically called out by one of the SEC guidance letters as something that was a security at the time of its issuance but is no longer a security because material facts pertinent to the Howey Test have changed (notably, they delivered on the product, ETH now has significant use-value apart from speculative purposes, and development & decision-making are decentralized). That something could move from "security" to "not a security" in 3 years while preserving the ownership interests of stakeholders should probably tell you that crypto is something new, though, and that existing legal frameworks don't properly capture how it behaves.
      - gowld 7y ago
        Eth was a security was it stopped being a security before SEC took action, so there's nothing for SEC to do.now.
    - toomuchtodo 7y ago
      "The CFTC has designated bitcoin as a commodity. Fraud and manipulation involving bitcoin traded in interstate commerce are appropriately within the purview of the CFTC, as is the regulation of commodity futures tied directly to bitcoin. That said, products linked to the value of underlying digital assets, including bitcoin and other cryptocurrencies, may be structured as securities products subject to registration under the Securities Act of 1933 or the Investment Company Act of 1940." https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11#_ftnref2 https://www.sec.gov/news/public-statement/statement-clayton-...
  - tadfisher 7y ago
    Because Bitcoin and Ethereum are not stand-ins for shares in a particular entity.
    - jki275 7y ago
      Eth and BTc are quite different and Eth is absolutely a security. Eth meets the Howey test. BTc arguably does not due to its manner of distribution and initiation.
      - DennisP 7y ago
        According to the SEC chairman, ETH may have been a security at first but it's not anymore. https://coincenter.org/link/sec-chairman-clayton-just-confirmed-commission-staff-analysis-that-ethereum-and-cryptos-like-it-are-not-securities https://coincenter.org/link/sec-chairman-clayton-just-confir...
        jki275 7y ago
        Yes, the SEC has handwaved it out of being a security. That doesn’t change facts, they simply aren’t going to do anything about it.
      - loceng 7y ago
        Do we know for sure how it was distributed and initiated BT though? We don't even know who "Satoshi Nakamoto" is.
      - fastball 7y ago
        What entity are you investing in when you purchase ETH?
        jki275 7y ago
        Vitalik Buterin and the other whales who started it.
        7y ago
  - jonnydubowsky 7y ago
    The SEC doesn't decide whether a token is a security or not. It either is or it isn't, and the determination they make is based on work thst any company can and should do themselves before issuing any tokens in any form. There are clear methods that can be followed to know whether or not you are going to get a scary letter later. Going through these measures to understand if what you are issuing is a security is not unusually difficult. It does take time, and often requires seeking good legal advice. The strategy many of the worst ico's used, of trying to write their way around the very real considerations of securities laws, was poorly thought out and now they are paying the price. There are many instances of projects that went about this the right way, I.e Filecoin, Ocean Protocol, Cardstack.
- DennisP 7y ago
  First clause of the Howey Test is that there's an investment of money. Perhaps at some point the SEC lawyers will argue to a court that something can still be a security without an investment of money, but I don't think there's any particular reason to think a court will agree.
  - elliekelly 7y ago
    You're conflating the definition of a "security" under the Securities Act with the definition of an "investment contract" (undefined in the Securities Act and defined by the court in Howey). An "investment contract" is just one of many things that fall within the definition of "security": > The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Source: https://www.law.cornell.edu/uscode/text/15/77b https://www.law.cornell.edu/uscode/text/15/77b
    - DennisP 7y ago
      Can you give an example of something that fails the Howey test, but is required to follow the SEC regulations that govern ICOs?
      - elliekelly 7y ago
        A few things to clarify: The SEC's position is that tokens are "securities" under the Securities Act and the Securities Act says that all securities must be registered if they're going to be sold to the public. Since the SEC views the tokens as securities (no different from company stock), and securities must be registered to be sold to the public, then (according to the SEC) an ICO of an unregistered token violates securities regulations. To that end, the SEC hasn't issued "regulations that govern ICOs" they've issued guidance as to how the _existing_ securities regulations apply to tokens and ICOs. The rules haven't changed, the SEC has just attempted to make it clear that the rules do apply even though they haven't necessarily been enforced. That guidance has come in the form of a statement for ICO issuers[1], a 'Framework for "Investment Contract" Analysis of Digital Assets'[2], and a statement on cryptocurrencies and ICOs[3]. All three include language along the lines of: > This framework represents Staff views and is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This framework, like other Staff guidance, is not binding on the Divisions or the Commission. As I mentioned in my comment above, the definition of "security" includes a lot of situations. The Howey test only applies to _one_ of those situations: investment contracts. Since "investment contracts" are a type of "security" an investment contract is subject to all of the same rules and regulations as any other security. Investment contracts are sort of the catch all category in the definition of "security" and why you'll often hear the term come up with respect to cryptocurrency because cryptocurrency is not specifically included in the statutory definition of "security." Many types of securities fail the Howey test because they aren't "investment contracts" but they are still a "security" and still subject to the same regulations. For example, employee stock options fail the Howey test because they aren't "an investment of money" and because profits aren't expected "solely from the efforts of a third party." But the Howey test would never be applied to employee stock options because we know "options" and "stock" and "profit-sharing agreement" are all specifically included in the definition of "security." So it doesn't really matter whether employee stock options are an investment contract - they're still subject to the same regulations. [1] https://www.sec.gov/news/public-statement/statement-framework-investment-contract-analysis-digital-assets https://www.sec.gov/news/public-statement/statement-framewor... [2] https://www.sec.gov/files/dlt-framework.pdf https://www.sec.gov/files/dlt-framework.pdf [3] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 https://www.sec.gov/news/public-statement/statement-clayton-...
andrewmutz 7y ago
The continuous pump-and-dump activity that you see in the crypto space is a clear demonstration that they should be regulated by the SEC. Regulation is unpopular among the people inside the regulated industry, but it protects society as a whole.
- dsfyu404ed 7y ago
  >but it protects society as a whole. Regulations may be a net positive overall but there are plenty of examples of bad regulation. The general case does not necessarily apply to any one case and even if it does there's still plenty of room to screw up the implementation. You can't just hand wave and say "well regulation is generally good so therefore this specific regulation must also be good". That's the same flawed logic as using demographic statistics as if they apply to individuals. I can't believe I'm defending crypto here.
  - danmaz74 7y ago
    Not the op, but: it's not that every piece of regulation is great, but regulation as a whole protects society as a whole
- nostrademons 7y ago
  It's often the other way around: regulation is popular among people inside the regulated industry (it keeps competitors out, while being treated as "just business as normal" by employees of the regulated industry), while being unpopular with potential new entrants on the outside. The only industries that really fight regulation are those where there's currently a mad scramble of new startups trying to gain position (see eg. dot-coms in 1999 or crypto in 2019). Nurses don't fight HIPAA, bankers don't fight margin requirements, contractors don't fight building codes, brokers don't fight broker licensing, and daycares don't fight safety standards.
  - miohtama 7y ago
    Banks lobby against regulation that would protect the consumer, make pricing more transparent and generally hurt banks' bottom line. https://www.huffpost.com/entry/auction-2012-banks-lobby-washington_n_1240762?guccounter=1 https://www.huffpost.com/entry/auction-2012-banks-lobby-wash... Corporate lobbying has not been that strong in EU, where SEPA wire transfers are fee and merchant card fees reasonable capped. And now as the latest PSD2 directive the banks must give you an API access to your own bank account.

toomuchtodo 7y ago

You're giving away a security that is still considered a security. That doesn't mean it won't be regulated as a security.

seibelj 7y ago
Yet Bitcoin and Ethereum are not considered securities by the SEC. So clearly the same sort of asset is considered a security sometimes but not other times, essentially whenever the SEC decides.
- stingraycharles 7y ago
  > Yet Bitcoin and Ethereum are not considered securities by the SEC. Why is that ?
  - seibelj 7y ago
    Bitcoin and Ethereum do not pass the Howey Test because they are "sufficiently decentralized", primarily because no single enterprise is responsible for developing it. But there is no framework on how exactly one becomes sufficiently decentralized, and because Ethereum had an ICO and is not a security, we know there is a way to do an ICO without needing to be registered. Unfortunately the current regulatory framework is opaque. The SEC "knows them when they sees them" so to speak but cannot explain clearly how to avoid becoming a security. My hope is that this lawsuit will result in clear guidance on how to become a Bitcoin or Ethereum, which will significantly help boost the industry.
    - nostrademons 7y ago
      ETH was specifically called out by one of the SEC guidance letters as something that was a security at the time of its issuance but is no longer a security because material facts pertinent to the Howey Test have changed (notably, they delivered on the product, ETH now has significant use-value apart from speculative purposes, and development & decision-making are decentralized). That something could move from "security" to "not a security" in 3 years while preserving the ownership interests of stakeholders should probably tell you that crypto is something new, though, and that existing legal frameworks don't properly capture how it behaves.
    - gowld 7y ago
      Eth was a security was it stopped being a security before SEC took action, so there's nothing for SEC to do.now.
  - toomuchtodo 7y ago
    "The CFTC has designated bitcoin as a commodity. Fraud and manipulation involving bitcoin traded in interstate commerce are appropriately within the purview of the CFTC, as is the regulation of commodity futures tied directly to bitcoin. That said, products linked to the value of underlying digital assets, including bitcoin and other cryptocurrencies, may be structured as securities products subject to registration under the Securities Act of 1933 or the Investment Company Act of 1940." https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11#_ftnref2 https://www.sec.gov/news/public-statement/statement-clayton-...
- tadfisher 7y ago
  Because Bitcoin and Ethereum are not stand-ins for shares in a particular entity.
  - jki275 7y ago
    Eth and BTc are quite different and Eth is absolutely a security. Eth meets the Howey test. BTc arguably does not due to its manner of distribution and initiation.
    - DennisP 7y ago
      According to the SEC chairman, ETH may have been a security at first but it's not anymore. https://coincenter.org/link/sec-chairman-clayton-just-confirmed-commission-staff-analysis-that-ethereum-and-cryptos-like-it-are-not-securities https://coincenter.org/link/sec-chairman-clayton-just-confir...
      - jki275 7y ago
        Yes, the SEC has handwaved it out of being a security. That doesn’t change facts, they simply aren’t going to do anything about it.
    - loceng 7y ago
      Do we know for sure how it was distributed and initiated BT though? We don't even know who "Satoshi Nakamoto" is.
    - fastball 7y ago
      What entity are you investing in when you purchase ETH?
      - jki275 7y ago
        Vitalik Buterin and the other whales who started it.
        7y ago
- jonnydubowsky 7y ago
  The SEC doesn't decide whether a token is a security or not. It either is or it isn't, and the determination they make is based on work thst any company can and should do themselves before issuing any tokens in any form. There are clear methods that can be followed to know whether or not you are going to get a scary letter later. Going through these measures to understand if what you are issuing is a security is not unusually difficult. It does take time, and often requires seeking good legal advice. The strategy many of the worst ico's used, of trying to write their way around the very real considerations of securities laws, was poorly thought out and now they are paying the price. There are many instances of projects that went about this the right way, I.e Filecoin, Ocean Protocol, Cardstack.
DennisP 7y ago
First clause of the Howey Test is that there's an investment of money. Perhaps at some point the SEC lawyers will argue to a court that something can still be a security without an investment of money, but I don't think there's any particular reason to think a court will agree.
- elliekelly 7y ago
  You're conflating the definition of a "security" under the Securities Act with the definition of an "investment contract" (undefined in the Securities Act and defined by the court in Howey). An "investment contract" is just one of many things that fall within the definition of "security": > The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Source: https://www.law.cornell.edu/uscode/text/15/77b https://www.law.cornell.edu/uscode/text/15/77b
  - DennisP 7y ago
    Can you give an example of something that fails the Howey test, but is required to follow the SEC regulations that govern ICOs?
    - elliekelly 7y ago
      A few things to clarify: The SEC's position is that tokens are "securities" under the Securities Act and the Securities Act says that all securities must be registered if they're going to be sold to the public. Since the SEC views the tokens as securities (no different from company stock), and securities must be registered to be sold to the public, then (according to the SEC) an ICO of an unregistered token violates securities regulations. To that end, the SEC hasn't issued "regulations that govern ICOs" they've issued guidance as to how the _existing_ securities regulations apply to tokens and ICOs. The rules haven't changed, the SEC has just attempted to make it clear that the rules do apply even though they haven't necessarily been enforced. That guidance has come in the form of a statement for ICO issuers[1], a 'Framework for "Investment Contract" Analysis of Digital Assets'[2], and a statement on cryptocurrencies and ICOs[3]. All three include language along the lines of: > This framework represents Staff views and is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This framework, like other Staff guidance, is not binding on the Divisions or the Commission. As I mentioned in my comment above, the definition of "security" includes a lot of situations. The Howey test only applies to _one_ of those situations: investment contracts. Since "investment contracts" are a type of "security" an investment contract is subject to all of the same rules and regulations as any other security. Investment contracts are sort of the catch all category in the definition of "security" and why you'll often hear the term come up with respect to cryptocurrency because cryptocurrency is not specifically included in the statutory definition of "security." Many types of securities fail the Howey test because they aren't "investment contracts" but they are still a "security" and still subject to the same regulations. For example, employee stock options fail the Howey test because they aren't "an investment of money" and because profits aren't expected "solely from the efforts of a third party." But the Howey test would never be applied to employee stock options because we know "options" and "stock" and "profit-sharing agreement" are all specifically included in the definition of "security." So it doesn't really matter whether employee stock options are an investment contract - they're still subject to the same regulations. [1] https://www.sec.gov/news/public-statement/statement-framework-investment-contract-analysis-digital-assets https://www.sec.gov/news/public-statement/statement-framewor... [2] https://www.sec.gov/files/dlt-framework.pdf https://www.sec.gov/files/dlt-framework.pdf [3] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 https://www.sec.gov/news/public-statement/statement-clayton-...

andrewmutz 7y ago

The continuous pump-and-dump activity that you see in the crypto space is a clear demonstration that they should be regulated by the SEC. Regulation is unpopular among the people inside the regulated industry, but it protects society as a whole.

dsfyu404ed 7y ago
>but it protects society as a whole. Regulations may be a net positive overall but there are plenty of examples of bad regulation. The general case does not necessarily apply to any one case and even if it does there's still plenty of room to screw up the implementation. You can't just hand wave and say "well regulation is generally good so therefore this specific regulation must also be good". That's the same flawed logic as using demographic statistics as if they apply to individuals. I can't believe I'm defending crypto here.
- danmaz74 7y ago
  Not the op, but: it's not that every piece of regulation is great, but regulation as a whole protects society as a whole
nostrademons 7y ago
It's often the other way around: regulation is popular among people inside the regulated industry (it keeps competitors out, while being treated as "just business as normal" by employees of the regulated industry), while being unpopular with potential new entrants on the outside. The only industries that really fight regulation are those where there's currently a mad scramble of new startups trying to gain position (see eg. dot-coms in 1999 or crypto in 2019). Nurses don't fight HIPAA, bankers don't fight margin requirements, contractors don't fight building codes, brokers don't fight broker licensing, and daycares don't fight safety standards.
- miohtama 7y ago
  Banks lobby against regulation that would protect the consumer, make pricing more transparent and generally hurt banks' bottom line. https://www.huffpost.com/entry/auction-2012-banks-lobby-washington_n_1240762?guccounter=1 https://www.huffpost.com/entry/auction-2012-banks-lobby-wash... Corporate lobbying has not been that strong in EU, where SEPA wire transfers are fee and merchant card fees reasonable capped. And now as the latest PSD2 directive the banks must give you an API access to your own bank account.